Some of us may find it difficult to believe that as of Dec 31, 2015, we have some 1.2 million local companies and almost 5,000 foreign companies registered with SSM (Suruhanjaya Syarikat Malaysia). This is actually a small figure if we compare it with non-corporate business entities registered with SSM, totalling more than six million.
Many believe that, in due time, some of these non-corporate business entities will transform themselves into corporate entities as their owners register them as such with the SSM. This will be in line with one of the major objectives of the new Companies Act 2016 (Act 777) — which is to simplify the registration of new companies and facilitate entry of our home-grown business people into the corporate world.
Act 777 has yet to come into force. Many speculate that this may happen in the first quarter of next year. When it does, our 50-year-old Companies Act 1965 (Act 125) will cease to exist. The entire legal landscape affecting our corporate players will change irrevocably.
The move to modernise our corporate law began more than a decade ago. In 2003, the government established the Corporate Law Reform Committee (CLRC) to carry out an in-depth research into the law and determine its future content and directions. Since Act 125 came into force, it had been updated 35 times, the most recent being the Companies (Amendment) Act 2007. However, these piece-meal amendments lacked a systematic and coherent review of current law and practices.
Although Act 125 was modelled on the Australian Uniform Companies Act 1961, many of its provisions have since been influenced by English company law and are considered no longer relevant with how businesses are conducted today.
Commonwealth countries, such as Australia, Canada, Singapore and New Zealand, have abandoned many aspects of English corporate law when they reformed their respective corporate legislation. The CLRC’s task was, therefore, enormous — modernise our corporate law to keep up with changing times.
In the ensuing years, the CLRC had issued a total of 12 consultative documents for public consultation. It then made several recommendations as contained in its report, “Review of The Companies Act 1965 — Final Report of the CLRC” (available in cyberspace). Among these recommendations are:
THERE should be a single law for companies of all sizes;
THE distinction between private and public companies should be retained;
NEWLY formed companies should have the capacity of natural persons;
THE doctrine of constructive notice should be abolished, except in relation to the Register of Charges;
COMPANIES should be allowed to incorporate with only a single member who can be the director;
THE mandatory name reservation process should be done away with; and the register of reserved names should be made available to the public;
THE requirement for a statutory declaration should be replaced with a requirement for a statement of compliance;
WRITTEN resolution procedures should be available to private companies only;
THE law should facilitate the use of any technology that will allow shareholders reasonable opportunity to participate in meetings;
THE right of the shareholders at
a general meeting to remove a director should be made applicable to public companies only and should not be extended to private companies; and
COMPANIES limited by shares should no longer be required to state their authorised share capital in their memorandum, and all shares of a company should no longer have a par value attached to them.
The CLRC made a total of 188 recommendations, out of which 183 were accepted and were subsequently translated into 19 policy statements. The cabinet approved them on June 18, 2010 and thereafter the tedious work of legal drafting began. When work was done, the law doubled in length and obviously has become even more difficult to comprehend.
If Act 125 (our existing company law) has only 12 parts, 374 sections and 10 schedules, the new law (Act 777) has only five parts but 620 sections and 13 schedules. Act 777 is, therefore, not just an amendment of the earlier law, but a complete replacement.
A quick study of Act 777 shows dramatic changes in the law, including:
COMPANIES no longer need to state their authorised capital;
COMPANY incorporation is now much simpler;
PRIVATE companies no longer need to have two directors; one director is sufficient;
COMPANIES no longer need to have their M&A (Memorandum and Articles of Association);
ANNUAL general meetings are no longer compulsory for private companies;
COMPANY shares no longer need to have a par value;
TWO corporate rescue mechanisms are introduced to help ailing companies — corporate voluntary arrangement and judicial management;
DIVIDENDS can only be paid out of profits (in keeping with the newly-introduced solvency test);
NEW rules and procedure for reduction of capital; and
HEAVIER penalties (fines and imprisonment) for various offences.
The familiar principle that a company has a distinct legal entity separate from its owners is retained. The rule that a company must have its company secretary and auditor, have its registered address in Malaysia, and must keep various important documents at that place has also been retained.
However, Act 777 gives companies a choice whether to have a company seal or not; it was mandatory under the earlier law.
Under Act 125, it is mandatory for a company to have its M&A.
Under Act 777, the M&A is replaced with a company constitution. Companies now have a choice whether to draw up their own constitution or use the relevant provisions of Act 777 as their constitution.
The qualifying age to become a company director is 18. To be appointed as a company director, the person must not be a bankrupt and has not been convicted of specified offences. A person cannot be appointed a director unless he has given his consent in writing.
A company directorship carries with it onerous duties. Under Section 213(1) of Act 777, a director must “at all times” use his powers “for a proper purpose in good faith in the best interest of the company”. Under Section 213(2), he must exercise his duties with “reasonable care, skill and diligence”.
Failure to comply with these important provisions will result in a heavy punishment for the defaulting director — a prison term of three years, a fine of RM3 million, or both. In judicial terms, these duties are described as “fiduciary duties”.
The serious impact of these fiduciary duties is underscored recently in a case involving oil-and-gas services provider Tanjung Offshore Bhd. The company informed the authorities (Bursa Malaysia) that it had filed a suit against its former group adviser and managing director and two other parties over alleged breaches of fiduciary duties. The plaintiff sought payment of RM20 million for breach of fiduciary duties, negligence, breach of trust and conspiracy.
Apart from containing provisions dealing with the duties and responsibilities of company directors, Act 777 also contains provisions affecting promoters, company secretaries, auditors, financial management matters, reduction of capital, solvency test and two new corporate rescue mechanisms.
Malaysian corporate citizens and entities, enjoying the familiarity of Act 125 for the last 50 years, will now have to prepare themselves to comply with a more demanding new legal regime.
Salleh Buang formerly served the Attorney-General’s Chambers before he left for practice, the corporate sector and, then, the academia